- RBI introduces Prompt Corrective Action when the Bank’s financial conditions worsen below certain limits (trigger points).
- The limit set are in the form of three conventional financial indicators which are called trigger points– CRAR, Net NPA and Return on Assets.
- Trigger points implies the RBI imposes corrective action in accordance with the level of trigger points.
What is Prompt Corrective Action Framework?
RBI has issued a policy action guideline (first in May 2014 and revised effective from April 1, 2017) in the form of Prompt Corrective Action (PCA) Framework if a commercial bank’s financial condition worsens below a mark. The PCA framework specifies the trigger points or the level in which the RBI will intervene with corrective action. This trigger points are expressed in terms of parameters for the banks.
The parameters that invite corrective action from the central bank are:
- Capital to Risk weighted Asset Ratio (CRAR)
- Net Non-Performing Assets (NPA) and
- Return on Assets (RoA)
- Leverage ratio
When these parameters reach the set trigger points for a bank (like CRAR of 9%, 6%, 3%), the RBI will initiate certain structured and discretionary actions for the bank. As per the revised framework by the RBI, in April 2017, capital, asset quality and profitability continue to be the key areas for monitoring. Along with this, leverage of banks also will be monitored.
The some of the structured and discretionary actions that could be taken by the Reserve Bank are: recapitalization, restrictions on borrowing from inter-bank market to steps to merge/amalgamate/liquidate the bank or impose moratorium on the bank if its CRAR does not improve beyond etc.). The corrective actions are tough with worsening of the financials. The major trigger points in the original format were:
(i) CRAR less than 9%, but equal or more than 6%
(ii) CRAR less than 6%, but equal or more than 3%
(iii) CRAR less than 3%
(i) Net NPAs over 10% but less than 15%
(ii) Net NPAs 15% and above
ROA below 0.25%
The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs.